In the words of the new Prime Minister, speaking on the day he took office, the UK is facing a ‘profound economic crisis’. Prices are rising at the highest rate for 40 years. This is currently being driven by higher energy and food prices as a consequence of the war in Ukraine, along with upward pressure on prices as businesses are charging more for their goods and services due to the higher costs they face. The interest rate is the highest it’s been since 2008. Mortgage rates have hit their highest levels in 14 years, and we’re seeing the highest levels of company insolvencies since 2009.
Some sectors that were hit hardest by the pandemic such as tourism, hospitality and some retail businesses are now being particularly affected by the rising cost of doing business, as they are less able to absorb additional costs and debt, and they rely for the most part on non-essential spending. Over the past couple of years, accommodation and food services, and wholesale and retail are among the sectors with the highest number of insolvencies.
So while businesses in these sectors are facing additional costs and the dilemma of how much to pass onto the consumer in the form of price rises, they are acutely aware that their customers’ disposable incomes have been hit hard.
Rising inflation driven by increasing domestic energy prices and recent rises in interest rates are combining to squeeze disposable incomes in a way not seen for many years. Less money in people’s pockets after they have paid their bills each month means hard choices need to be made and consumers inevitably will have to cut back their spending on non-essential things like holidays, nights out and shopping trips.
Let’s take a look at some of the issues facing hospitality, tourism and retail sectors in more detail.
Tourism – legislative changes create a “Catch-182” situation
The Welsh Government announced new legislative measures in March 2022, affecting second homes and holiday lets. From April 2023, local councils will be able to raise the maximum council tax premium on second homes to 300% (up from the 100% limit set in 2017). In addition, new regulations have been set in place to increase the number of days that self-catering accommodation must be let each year in order to qualify for business rates (rather than pay council tax), rising from 70 days to 182 days.
According to recent research published by the Welsh Government, the desire to avoid paying the council tax premium on second homes is causing a dilemma for some self-catering operators who are unsure whether they should remain open during the winter. The report states that some operators “don’t see the winter as a cost-effective time to open, but if they don’t try, they won’t realistically meet the 182 day quota”.
Looking at the sector as a whole, the research found that 50% of tourism operators are very or fairly confident about running their business profitably this autumn. However, 30% of tourism operators are not very or not at all confident about the prospects for the autumn. [NB: this research was carried out in August and September 2022, prior to the UK Government’s announcement of the Energy Bill Relief Scheme for businesses.]
In July 2022, the First Minister Mark Drakeford and Leader of Plaid Cymru Adam Price jointly announced changes to planning regulations in Wales to introduce new use classes (which came into effect on 20 October) to better differentiate between primary and secondary homes and short-term lets. The announcement also included plans to develop a new statutory licensing scheme for all visitor accommodation and to allow councils greater powers over land transaction tax rates and second home numbers.
Another issue on the horizon for the tourism sector is the possible introduction of a “discretionary visitor levy for local authorities”, as identified in the Co-operation Agreement between the Welsh Government and Plaid Cymru. The Welsh Government is currently consulting on proposals, which according to the consultation document, would take some years to develop and implement.
The sector has reacted strongly to the proposed levy, with the Wales Tourism Alliance suggesting it would be “misguided and damaging”. The consultation is open until 13 December.
Hospitality – significant vacancies continue to stifle growth
In March 2022, the Economy, Trade and Rural Affairs Committee took evidence on the issues facing the hospitality, tourism and retail sectors. The Committee heard about some of the challenges facing the sectors, including the impact of Brexit on skills shortages, the fact that 78% of the hospitality sector had been on furlough which was affecting recovery, and many businesses were still carrying huge numbers of vacancies.
Commenting on the latest official employment figures released in October 2022, UKHospitality Chief Executive Kate Nicholls said “there are still significant vacancies, stifling our ability to drive growth”. She also highlighted that “there is still work to do and we continue to hear from businesses about how recruitment challenges are putting the brakes on recovery”.
As part of the response to the pandemic the UK Government temporarily reduced the rate of VAT payable by hospitality and tourism businesses from the standard rate of 20% to 5% between July and September 2021, and to 12.5% between October 2021 and the end of March 2022.
UKHospitality have continued to call for the re-introduction of a lower rate of VAT and further business rates relief for the sector.
Retail - financial pressures give consumers pause for thought
New figures released by retail analyst Springboard suggest that the high street’s post-pandemic recovery is slowing due to rising inflation. According to Springboard “the ongoing rate of inflation combined with the recent rise in interest rates means that from October onwards shoppers will inevitably exercise even greater discretion and be more considered in their purchasing behaviour”.
In June 2022 the Welsh Government published a “shared strategic vision for the retail sector”, which sets out how the Welsh Government, the retail sector and trade unions will work together to develop a “successful, innovative, sustainable and resilient sector”.
The document highlights the main issues facing the sector, which include the changing role of town centres, the impact of new technologies, shifts in consumer patterns and behaviours, and challenges in relation to employment conditions, workforce recruitment and retention.
The strategic vision also identifies the “four core strategic challenges of our time” which are affecting the retail sector, along with the rest of the economy:
- recovering from the impact of the coronavirus pandemic;
- addressing the demands of climate change and the move to Net Zero;
- responding to the cost of living crisis;
- and continuing to adapt to our future outside of the European Union.
Back in June the Minister stated that a delivery-focussed action plan would follow “in the coming months”.
The Senedd is due to debate the Economy, Trade and Rural Affairs Committee’s report “Raising the Bar: Securing the future of Hospitality, Tourism and Retail” on 9 November. You can watch the debate here.
Article by Ben Stokes, Senedd Research, Welsh Parliament